Chapter Objectives To evaluate reasons for and against using credit and Chapter 6. Short Term Credit decide whether or not credit is appropriate for you. To be able to take the necessary steps to establish Management credit and develop a credit history. To identify what is meant by revolving credit and how it is used. To understand how to use credit cards properly and to know your legal rights as a borrower against credit mistakes. To learn how installment credit works. To compare the various sources of credit and to learn what to do if you experience credit problems. Major Topics Reasons for Using Credit As a Shopping Convenience Arranging and Using Credit Especially good for record keeping, rebates, other benefits Revolving Credit To Increase Total Consumption Installment Credit Actual borrowing As an Inflation Hedge Obtaining Credit and Resolving Credit Buy now to avoid higher future prices Problems As a Source of Emergency Funds If you don’t have 3-6 months of liquid assets … How to Get Credit Disadvantages of Using Credit Consider what the lender looks for (3 C’s) Character: previous obligations Temptation to overspend Capital: financial assets All too common. Keep in mind credit needs to be repaid Capacity: future obligations with interest! It’s not free money! Begin a credit record. Credit costs Open savings and checking accounts. Some can be very high Open a retail charge account. Qualify for a small installment loan. Less flexibility with future budgets Make sure your credit records follow you. When you borrow, you are borrowing against your future Have a telephone installed. income. Review your credit report. Repair a bad credit record.
Special Concerns for Spouses The Role of the Credit Bureau Establishing Credit Make sure your credit history is in your name. Don’t use a Does not decide who receives credit. social title. ex., Mrs.Edward Hall Stores information on past use of credit Inform creditors that you wish to maintain your own credit history. Stores information on legal actions against Know the difference between a joint and individual credit you. account. Joint Credit Account: Sells credit reports to lenders. • Both spouses responsible for debt. • Divorced or separated spouses should cancel joint accounts. Individual Credit Account • Only you are responsible for debt. • Account will appear only on you credit report. Contents of a Credit Report Credit Report The three largest credit bureaus Existing credit accounts Equifax: http://www.equifax.com Trans Union: http://www.transunion.com Information on each credit account includes Experian: http://www.experian.com Now consumers can obtain credit reports for free once a year. credit limit, loan amount and account balance For more information about credit, visit Federal Trade Commission Website at who is responsible for paying the account http://www.ftc.gov/bcp/conline/edcams/credit/index.html For your free credit report, visit Public record information https://www.annualcreditreport.com/cra/index.jsp Credit report and credit score are used for many purposes bankruptcies, tax liens and monetary judgments (insurance, job, rental, etc.) these days. In addition, identity Who has obtained a copy theft is becoming a major consumer fraud issue. You need to be diligent about checking your credit report. It is a good idea to obtain one credit report every four months, rotating among the three credit bureaus. If You are Denied Credit Credit Accounts Obtain a copy of your report. Revolving credit account Correct any mistakes. An open-end account with an established line of credit and rules for minimum Submit your own statement on disputed payments. claims. Retail installment account Have adverse information that is old removed from report. An closed-end account that has a separate installment contract for each purchase Have those who received report notified of any incorrect entries.
Required Information on Revolving Charge Account Revolving Credit Account Truth in Lending Act Credit limit determined by credit record and Annual percentage rate (APR) applied to net worth. balance. Partial payment must be made each month. Method for calculating interest. Interest charged on unpaid balance. Grace period, if any. Account may never actually be paid off. Minimum monthly payment, and penalties for late payment. Permission to investigate credit history. Interest Computation Methods Major Issuers of Credit Cards Previous balance method Bank Credit Cards Rate applied to balance at end of previous month. Discover MasterCard Visa Adjusted balance method Equal to the previous balance less any payments or returns made Travel & Entertainment Cards during the current billing cycle American Express Average daily balance method (most common) including current purchases Other Cards excluding current purchases Department store chains Two-cycle average daily balance method Eliminates a grace period in the previous month when you fail to Major gasoline retailers completely pay off the balance in the present month. Can go back two periods to collect interest on unpaid balance. Credit Card Cost Comparison Credit Card Benefit Comparison Credit limit Credit life Annual membership Annual percentage fee rate Disability insurance Rebates & Variable rate Grace period discounts Accident insurance information Cash advance fee Frequent flyer Rental car collision Balance computation miles Over-the-limit penalty insurance method Replacement fee Credit card registry Warranty protection Late payment fee Fees for optional Purchase price Merchandise loss Copy charge services protection protection
Payback Period Protect Against Credit Card Fraud $3,000 Credit Balance @ 19% APR Monthly Months Total Interest Record card numbers, expiration dates and Payment phone number for card company. $60 100 $2,991 Destroy old bills, receipts and credit cards. 75 64 1,790 Check sales receipt and compare with credit 100 42 1,102 card statement. 125 31 804 Be careful giving out your card number. Report lost and stolen cards immediately. Correcting Credit Mistakes Other Credit Terms Notify the creditor in writing within 60 days after bill was Chargeback mailed. a disputed amount charged back to the Pay parts of the bill that are not in dispute. merchant by the credit card company. Creditor will notify you within 30 days of its decision. If no error is found, you must pay or you will be reported Credit blocking as delinquent. a reduced credit limit based upon an If you still challenge in writing the creditor must report expected purchase that information. Provide credit bureau with your explanation of the dispute. Debit Cards Installment Credit Bank deposit is immediately reduced Repay the debt by You do not have the protections afforded A series of uniform payments called credit card purchases installments Lost or stolen credit cards are covered by the Elements of a retail installment contract Electronic Funds Transfer Act Promissory note you can lose up to $500 if you fail to notify issuer Security agreement within two days after learning of theft if you wait 60 days your losses may be unlimited
Figure. A 12-month installment loan with Methods for Charging Interest annual simple interest of 12 percent Monthly Outstanding Monthly Finance Loan Simple Interest Method Balance Payment Charge Repayment percentage rate applied to outstanding 1 $1,000.00 $88.85 $10.00 $78.85 loan balance 2 921.15 88.85 9.21 79.85 Discount Method interest deducted from credit extended you .... ... ... ... ... 11 175.07 88.85 1.75 87.10 Add-on Method 12 87.97 88.85 0.88 87.97 interest added to amount borrowed at Total $1,066.19 $66.19 $1,000 beginning of loan Discount Method Add-on Method Need $1,000 Need $1,000 Borrow $1,136.36 at 12% simple Total payments= $1,120 for 12% interest simple interest 1000/(1-12%)= 1136.36 1000* (1+ 12%)= 1,120 Monthly payment: 1136.36/12= $94.72 Monthly payment: 1120/12= $93.33 Annual Percentage Rate (APR) Sources of Credit Banking Institutions Same as annual simple interest. Overdraft protections Takes into consideration fees and methods Unsecured personal loans of computation Home equity line of credit In the previous example: Consumer Finance Companies Simple interest: APR=12% Specialized loans (GM cars) Other Discount: APR=24.28% Life insurance policies Add-on: APR=21.46% Margin accounts on stocks and bonds In credit shopping, compare APRs!!! Pawnbroker
If You have Personal Debt A Credit Management Strategy Problems – Credit Counseling Use the grace period. National Foundation of Credit Counseling Avoid expensive credit on revolving charge http://www.nfcc.org accounts. The only Utah location is in St. George Take a broad view of credit sources. • Credit Counseling of Utah, 163 West 1600 South # 2 Saint George, UT 84770 (800) 451-4505 Carefully consider the use of variable rate Utah State University Family Life Center: loans. Housing and Financial Counseling http://www.usu.edu/fchd/hfc.cfm Last Resort - Bankruptcy What a counselor will do: Bankruptcy statistics American Bankruptcy Institution: http://www.abiworld.org/ Develop a budget and a repayment plan to repay debt Negotiate a more reasonable repayment plan with the lenders Straight Bankruptcy (Chapter 7) Primary form of bankruptcy. Discharges all debts and provides a fresh start. Homeowner’s equity and some personal assets may be partially protected. Cannot file again for 6 years. Record remains on credit report for 10 years.
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